Super Mario Noose Tightens As Another Monte Paschi Derivative Emerges; Investigation Into Bank Of Italy Opened

As we have been reporting over the past ten days (most extensively here and here), the one European scandal that gets virtually no coverage on this side of the Atlantic, remains the escalating fiasco involving Italy's third largest bank, Banca dei Monte Paschi, which gets worse by the day due to its extensive political implications - the bank is seen domestically as the domain of the frontrunning centre-left candidate, something Berlusconi reminds his followers at every opportunity, but also will likely ensnare the head of the ECB as we predicted a week ago when we noted the aggressive attempts by the Bank of Italy, which was headed by the former Goldmanite at the time, to wash its hands of having had anything to do with the BMPS fiasco (and thus by implication indemnify that other Goldmanite, Mario Monti).

As it turns out, and as Bloomberg reports today, the Bank of Italy did know of Monte Paschi's dirty laundry as long ago as 2010, but more importantly, and hence the title, the Italian law (and we use the term loosely) is now in play: "Prosecutors in Trani, Italy, opened an investigation into the Bank of Italy and market watchdog Consob’s supervisory activity on Monte Paschi, consumer group Adusbef said in an e- mailed statement today." Adding fuel to the fire is the just blasted headline from Reuters that Monte Paschi is now under investigation in Siena under law on company responsibility for crimes committed by staff, and suddenly life for the ECB head, not to mention the "stabeeleetee" of the banking sector looks quite problematic.

From Bloomberg:

The Bank of Italy under former Governor Mario Draghi spotted accounting irregularities that allowed Banca Monte dei Paschi di Siena SpA to mask losses more than two years before the lender was forced to say it will have to restate profit.


In 2010, “a problem came to light” on Monte Paschi’s booking of a structured deal called Santorini, Italy’s Rome- based central bank said in a report dated Jan. 28. The Bank of Italy alerted “other authorities” a year later and talks with those regulators, which it didn’t identify, haven’t concluded. It didn’t explain the delay in forcing the bank to disclose the information.


“I would have expected the Bank of Italy to have requested transparency from Monte Paschi back in 2010 after reviewing the transactions,” said Carlo Alberto Carnevale-Maffe, professor of business strategy at Milan’s Bocconi University. “Hidden documents found recently wouldn’t have changed the substance of the original findings.”


The Bank of Italy said that as early as 2010 it sought daily liquidity reports from the lender as margin calls on Santorini drained funds. The regulator said a week ago Monte Paschi hid documents, impeding its analysis of the “true nature” of the company’s dealings.

It got full reports, and did nothing. So naturally, the spin continues:

Regulatory oversight of Monte Paschi was “continuous and thorough” and the bank remains solid even with a capital shortfall and possible losses linked to structured deals, Finance Minister Vittorio Grilli said in parliament yesterday.

"Solid" after its third bailout in three years? Italian sure have some loose definitions.

And while the key fallout in this case is political, for now, with most of the heat falling on the Democratic Party's Bersani, who runs the local government in Siena where BMPS is based, the spotlight may and will soon shift to none other than everyone's favorite currency manipulator.

Draghi, 65, led the Bank of Italy from 2005 to 2011, when he left to succeed Jean-Claude Trichet, 70, at the helm of the European Central Bank. He has worked as an economics professor in Italy, a financial diplomat at the World Bank, a bureaucrat at his country’s Treasury and a banker at Goldman Sachs Group Inc. (GS) In December 2005, he was named to replace Italian central bank Governor Antonio Fazio, 76.


Officials for the Bank of Italy didn’t have an immediate comment. Asked about Draghi’s role in overseeing Monte Paschi, an ECB spokeswoman declined to comment.


Prosecutors in Trani, Italy, opened an investigation into the Bank of Italy and market watchdog Consob’s supervisory activity on Monte Paschi, consumer group Adusbef said in an e- mailed statement today. The investigation follows a complaint submitted by the lobby earlier this year.


The Bank of Italy’s role isn’t to “police” Monte Paschi, the current governor, Ignazio Visco, 63, said Jan. 25 in an interview with Bloomberg Television in Davos, Switzerland.


The Bank of Italy “summoned the senior management of Monte Paschi” and of the foundation that is its biggest shareholder in November 2011 “to make them face up to their responsibilities and ask Paschi to quickly and definitively turn around the way it conducts its business,” the report said.

But wait there is more.

Because while the bulk of the previously disclosed legacy derivative deals took place during the "Old Normal" before Italy had to be bailed out each and every day (current eye of the hurricane notwithstanding), yet another derivative deal has emerged, just as we predicted when we said that loads more of dirty laundry will emerge as follows: "Of course there will be more "cases" - to assume this is isolated is the height of stupidity and naivete, but what else is an Italian minister to do to preserve the precarious stability attained after months of endless bluster from the ECB that Europe is "fine" - why pull a Juncker and lie of course." Sure enough:

Monte Paschi risks further losses of as much as 500 million euros on a 2010 securitization of about 1.5 billion euros of real estate loans, dubbed “Chianti Classico,” weekly Panorama said today, citing documents that include minutes of board meetings from November and December of last year. A Monte Paschi official didn’t have an immediate comment on the report.

And while over the weekend the Bank of Italy gave its blessings to a third bailout of the troubled lender, not even that seems guaranteed:

Italian consumer association Codacons is seeking to block Monte Paschi’s bailout. The group said it will file a complaint in a Rome administrative court against the Cabinet, Economy Ministry, Italy’s central bank and market regulator Consob, seeking 3.9 billion euros in damages from the Bank of Italy for not adequately monitoring the bank’s activities.


Codacons’ request follows criticism about the central bank’s supervision raised by some politicians, including former Finance Minister Giulio Tremonti and another consumer group, Adusbef.

Because should the latest bailout of BMPS fail, and a rigorous investigation into what is truly going on in the Italian banks' balance sheets take place, the brief lull that Europe has been in in the past few months will abruptly end.

Sure enough, the local market may already be getting a whiff of the buried bodies, because as reported earlier, the local market just  suffered its worst drubbing in six months, with BMPS halted limit down into the close.

And with Italian elections in less than one month, and Monte Paschi suddenly the biggest leverage the opposition has against the status quo, expect for many more cockroaches to emerge in the coming days.


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